Quick Thoughts: De-Globalization – Myth Or Reality?

Summary Today, the buzzword is de-globalization. It is defined as the movement toward a less-interconnected world – one with groups of nation states replete with fresh barriers to the free movement of goods, services, capital, and labor dominating once again. The adoption of multi-lateral trade agreements was one of the driving forces of postwar globalization. Understanding the global political winds will be critical in deciphering what path globalization will ultimately take. piranka By Stephen H. Dover, CFA, Chief Market Strategist and Head of Franklin Templeton Institute, Franklin Templeton Is globalization truly dead? Stephen Dover, head of Franklin Templeton Institute, explores what drives globalization, whether we are currently in a “de-globalization” wave – and what it means for investors. Originally published in Stephen Dover’s LinkedIn Newsletter Global Market Perspectives. No one can deny the significance of today’s globalized economy. From our homes and offices, we can order an unimaginable array of goods and services from nearly every country in the world, delivered to our doorstep and enjoyed at our leisure. However, this was not always the case. In the millennia prior to the US Civil War, incessant human strife – as well physical limits on transportation and communication – kept nations, civilizations, and economies apart. However, the half-century between the end of the US Civil War and the start of the first World War saw the rise of a globalized economy. Moving forward, the period from 1914 to 1945 experienced two world wars separated by the Great Depression, which shattered humanity’s first try at globalization. It was only in 1945 under American hegemony that the second great era of globalization rebooted. This wave of globalization accelerated for almost four decades and gained powerful momentum with China’s emergence into the world economy in the early 1980s. The fall of the Berlin Wall in Germany reinforced this trend with the opening of communist countries after 1989. Today, the buzzword is de-globalization. It is defined as the movement toward a less-interconnected world – one with groups of nation states replete with fresh barriers to the free movement of goods, services, capital, and labor dominating once again. There are a variety of reasons that this narrative has taken hold, but to best explore whether this is truly the path we are on, an understanding of how we got here is needed. What drives globalization? We see three forces that drive globalization. The first is the ability to shorten distances in both transport and communication. The second is the commitment of nation states to establish and adhere to rules, standards, and safeguards that ensure that goods, services, capital, and labor can move relatively freely across borders. The third is the incentive of firms and consumers to push the boundaries of what is possible in the ever-present quest for profits and pleasure. First, consider the role of technology in connecting the world. Globalization could not emerge until modern sailing vessels, roads, railroads, and air travel made worldwide transportation both feasible and affordable. In a similar fashion, the telegraph, undersea cables, phones, radio – and more recently the internet and satellites – made instantaneous communication over great distances possible. Globalization required the emergent technologies of the 19th century and their refinements thereafter to shorten transportation and communication distance. Second, globalization requires the participation of nation states, willingly or otherwise. The first waves of globalization began with European colonization and empires, culminating in Britain’s dominance as the global naval power in the 19th and early 20th centuries. World wars shattered that dominance, with global hegemonic leadership shifting to the United States in 1945. Yet, in contrast to 19th century experience, the globalized economy of the past 75 years was codified in law, treaties, and international standards that eventually spawned willing cross-border trade, finance, transportation, travel, and, to a lesser degree, immigration. The second great era of globalization was an agreed framework, not one imposed by empire. The superstructure of modern globalization was the Bretton Woods institutions, including the General Agreement on Trades and Tariffs (GATT, which then morphed into the World Trade Organization), the International Monetary Fund (IMF), the World Bank, and a host of other international and governmental organizations. Together, these organizations established the legal, security, business, and everyday norms of global economic and financial engagement. Third, given the technological means to globalize as well as the legal, political, and security assurances to do so, it was all but inevitable that profit and consumption motives would complete the task. In the six decades from the late 1940s […]

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